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3. Aggregate Demand

e. explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance;

## f. explain the IS and LM curves and how they combine to generate the aggregate demand curve;

What is aggregate demand? Aggregate demand (AD) is the quantity of goods and services that households, businesses, and foreign customers want to buy at any given level of prices.

What is the IS Curve? - IS = invest/save - Lower interest causes people to save less and invest more. More investment causes more output, which creates more GDP. So the IS curve is “interest” on the Y-axis and “GDP” on the X-axis. It starts high on the Y-axis and slopes downward toward the X-axis.

“Consumption is a function of disposable income.” What does that statement mean? People buy more when their income increases or their taxes decrease.

What is marginal propensity to consume (MPC)? MPC is additional current consumption divided by additional current disposable income.

What is the LM Curve? The LM curve summarizes all the combinations of income and interest rates that equate money demand and money supply.